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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,2 -,37,2003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/Beasley,Audit Reports,Chapter 2,Learning Objective 1,Describe the parts of,the standard unqualified,audit report.,Parts of the StandardUnqualified Audit Report,1. Report title,2. Audit report address,3. Introductory paragraph,4. Scope paragraph,5. Opinion paragraph,6. Name of CPA firm,7. Audit report date,Learning Objective 2,Specify the conditions,required to issue the,standard unqualified,audit report.,Conditions for StandardUnqualified Audit Report,1. All financial statements are included.,2. The three general standards have been,followed in all respects on the engagement.,3. Sufficient evidence has been accumulated,to conclude that the three standards of,field work have been met.,Conditions for StandardUnqualified Audit Report,4. The financial statements are presented in,accordance with generally accepted,accounting principles,.,5. There are no circumstances requiring the,addition of an explanatory paragraph or,modification of the wording of the report.,Four Categoriesof Audit Reports,Standard unqualified,Unqualified with,explanatory paragraph,or modified wording,Qualified,Adverse or disclaimer,Learning Objective 3,Describe the five circumstances,when an unqualified report with,an explanatory paragraph,or modified wording is,appropriate.,Unqualified Reportwith Explanation,1. Lack of consistent application of generally,accepted accounting principles.,2. Substantial doubt about going concern.,3. Auditor agrees with a departure from promulgated accounting principles.,4. Emphasis of a matter.,5. Reports involving other auditors.,Consistency versusComparability,Changes that affect consistency and require,an explanatory paragraph if they are material:,1. Changes in accounting principles,2. Changes in reporting entities,3. Corrections of errors involving principles,Consistency versusComparability,Changes that affect comparability,but not consistency:,1. Changes in an estimate,2. Error corrections not involving principles,3. Variations in format and presentation of,financial information,4. Changes because of substantially different,transactions or events,Substantial Doubtabout Going Concern,1. Significant recurring operating losses or,working capital deficiencies,2. Inability of the company to pay its obligations as they come due,3. Loss of major customers, the occurrence of uninsured catastrophes,4. Legal proceedings, legislation, that might jeopardize the entitys ability to operate,Auditor Agrees with a Departurefrom a Promulgated Principle,The auditor must be satisfied and must state,and explain, in a separate paragraph or,paragraphs in the audit report, that adhering,to the principle would have produced a,misleading result in that situation.,Emphasis on a Matter,Under certain circumstances, the CPA may,want to emphasize specific matters regarding,the financial statements, even though the,CPA intends to express an unqualified opinion,.,Reports InvolvingOther Auditors,1. Make no reference in the audit report.,3. Qualify the opinion.,2. Make reference in the report,(modified wording report).,Learning Objective 4,Identify the types of audit,reports that can be issued,when an unqualified,opinion is not justified.,Departures from anUnqualified Opinion,1. Scope limitation,2. GAAP departure,3. Auditor not independent,Qualified Opinion,A,qualified opinion,report can,result from a limitation on the,scope of the audit or failure to,follow generally accepted,accounting principles.,Adverse Opinion,It is used only when the auditor believes,that the overall financial statements are,so materially misstated or misleading that,they do not present fairly the financial,position or results of operations and cash,flows in conformity with GAAP,.,Disclaimer of Opinion,It is issued when the auditor is unable,to be satisfied that the overall financial,statements are fairly presented.,Learning Objective 5,Explain how materiality affects,audit reporting decisions.,Materiality,A misstatement in the financial statements,can be considered material if knowledge of,the misstatement would affect a decision,of a reasonable user of the statements.,Levels of Materiality,Amounts are immaterial.,Amounts are material but do,not overshadow the financial,statements as a whole.,Amounts are so material or so,pervasive that overall fairness,of the statements is in question.,Relationship of Materialityto Type of Opinion,Materiality,Level,Significance in Terms of,Reasonable Users Decisions,Type of,Opinion,Users decisions are unlikely,to be affected.,Immaterial,Unqualified,Users decisions are likely,to be affected.,Material,Qualified,Users decisions are likely,to be significantly affected.,Highly,Material,Disclaimer,or Adverse,Materiality Decisions,Failure to,follow GAAP,Audit report,Unqualified,Qualified,opinion only,Adverse,Materiality Decisions,Dollar amount compared with a base,Measurability,Nature of the item,Materiality Decisions,Scope,limitation,Audit report,Unqualified,Qualified scope,and opinion,Disclaimer,Learning Objective 6,Draft appropriately modified,audit reports under a variety,of circumstances.,Discussion of ConditionsRequiring Departure,Auditors scope has been restricted.,Statements are not in conformity with GAAP.,Auditor is not independent.,Scope Restricted byClient or Conditions,Immaterial,Material,Level of Materiality,Extremely,Material,Unqualified,report,Qualified scope, additional,paragraph, and qualified,opinion (except for),Disclaimer,of opinion,Statements Not Prepared inAccordance With GAAP,Immaterial,Material,Level of Materiality,Extremely,Material,Unqualified,report,Additional paragraph,and qualified opinion,(except for),Adverse,opinion,The Auditor Is NotIndependent,Immaterial,Material,Level of Materiality,Extremely,Material,Disclaimer of opinion,(regardless of materiality),Learning Objective 7,Determine the appropriate,audit report for a given,audit situation.,Auditors Decision Process,Determine whether any condition exists,requiring a departure from a standard,unqualified report.,Decide the materiality for each condition,.,Decide the appropriate type of report.,Write the audit report.,Number of Paragraphsin the Report,Standard3,Unqualified with explanatory paragraph4,Unqualified shared report with other auditors3,Qualified opinion only4,Qualified scope and opinion4,Disclaimer scope limitation3,Adverse4,Learning Objective 8,Discuss the impact,of e-commerce on,audit reporting.,Impact of E-Commerceon Audit Reporting,Auditors are not required to read information,contained in electronic sites.,Most companies provide access to financial,information through their home Web page.,Auditing standards note that electronic sites,are not considered “documents.”,End of Chapter 2,
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